What a new fiduciary standard means to plan sponsors

Commentary: Recently, emotions were stirred when President Obama endorsed a fiduciary standard that would be applied uniformly to all investment advisers. You might think that all investment advisers are currently required to adhere to the same rules of conduct when counseling their clients, but that is not the case.

Fiduciary care vs. suitability

Investment advisers working for Registered Investment Advisory (RIA) firms are required to provide investment advice that keeps their client's best interests first and foremost. Advisers who work for brokerage firms are required to exercise a lower standard of care, called suitability, when providing investment advice to their clients. Suitability can best be defined as recommending investment options or products that are appropriate for the investor. There is no requirement that an investment adviser put a client’s best interest before his/hers or the brokerage firms. Many observers believe this leads brokerage firm advisers to recommend investment products that are best for the adviser and his/her employer.

Why would anyone oppose a uniform fiduciary standard?

According to the 2014 Edelman Trust Barometer the financial services industry continues to be the least trusted industry globally. Within the financial services industry, the least trusted sector is investment advisers and asset managers. With a significant opportunity looming to improve their reputations, most brokerage firms have actively lobbied (so far successfully) to delay consideration and implementation of a uniform fiduciary rule. They feel their business models would be threatened if they were forced to adhere to the same fiduciary standard as their competitors.

The advice you receive as a plan sponsor

All retirement plan sponsors should be working with investment advisers who have signed on to their plan as fiduciaries. If your investment adviser is not a fiduciary, either ask him/her to become one immediately or find a more qualified adviser. There are very few plan sponsors that will be impacted by a change in the fiduciary standard.

Individual investors who work with investment advisers employed by brokerage firms will be impacted significantly, and in a positive way, by a change in the fiduciary standard. Most, if not all, would be shocked to learn that their investment adviser is not currently subject to a fiduciary standard of care. After all, it is reasonable to expect that the transaction to purchase investment advice is conducted at a higher fiduciary level than, say, buying carpeting.

It is anticipated that the Department of Labor will publish its recommendation on a uniform fiduciary standard this year. It is long overdue.

Robert C. Lawton, AIF, CRPS is President of Lawton Retirement Plan Consultants, LLC, an RIA firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at bob@lawtonrpc.com or 414.828.4015.